What does "Bone location is set in local space" mean?
It means the bone behaves 'as normal' and location curves are based on the bone's rest position. If you uncheck it they (the curves/ transform) will be in the rotational space of the armature, ignoring the rest rotation of the bone.
Nathan added this during sintel I believe to avoid having to align bones in the rig. Honestly I think it is a nuisance.